Essentra plc (ESNT) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Essentra full year 2021 results presentation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Paul Forman. Please go ahead.

Good day, everyone, and a very warm welcome to the full year results for Essentra plc for 2021. My name is Paul Forman, and I'm Group CEO. And today, I will be joined by our Group CFO, Lily Liu; and the managing director of our Components division, Scott Fawcett. I think there are 3 key messages that I would like to start with and leave you with indeed, one of which is that we think 2021 has shown a very strong trading performance across the board; secondly, that the momentum is continuing or indeed increasing both in terms of margin profile but also year-on-year revenue growth notwithstanding that the comparables are getting more demanding; and third, that we are very focused on the 2 strategic reviews, whose goal is twofold, one of which is to release shareholder value by becoming a pure-play components business and, secondly, given the progress they've made strategically, commercially and operationally, to create 3 strong stand-alone global businesses. So if we go on to Slide 2 and the agenda. I will give a brief summary of highlights. I'll then ask Lily to talk to financial performance. Then I will ask Scott to talk about the divisional performance of Components. And then for the final 3 sections, I will cover the other matters that you can see there, including an outlook for 2022. So if we go on to Slide 3. It has, as the title suggests, I believe, been a successful year. We have had a good full year performance. And Lily will break that down, and I will break it down with Scott into the divisions as well. And it would be fair to say the 2 strategic reviews are progressing in line with the internal expectations. You will recall that we said the outcome of those would be known and communicated in Q2 at the earliest, but we naturally have very clear timetables and I'm pleased to say that those are being adhered to. In terms of the financial performance, you can see there an 8.5% like-for-like revenue growth and an almost 50% increasing in adjusted operating profit. The operating margins gets back to or is slightly ahead of the 2019 levels. And we have accelerated growth in all 3 divisions, with quarter 4 representing a 13% like-for-like pattern. Looking in slightly more detail. Components has sustained an increased revenue growth and seen margin expansion. Packaging, notwithstanding challenges both from the market, particularly in H1, but also labor and raw material availability challenges, has made real performance progress, is getting closer to the sector average operating margin that we've always been targeting and is showing an increasing revenue trend. And Filters, a small margin increase but, as importantly, strong revenue growth driven by the game changers that we've talked about; and I'll talk more about that as well. And the encouraging thing, if we look at quarter 1 and the likely outcome on a year-on-year basis, is if anything, that we'll see an improvement on the trend that we saw in Q4 with good progress across the board. Our journey towards being a very responsible, consistent with our purpose, supplier continues. And I'm pleased to say that both our sustainability, but also the broader ESG, we make good progress. And with the material profit growth and good management of net working capital as a percent of sales, we retain a strong balance sheet with a ratio of 1.5x net debt-EBITDA. That has given the Board the confidence to pursue its stated policy of announcing a progressive dividend. And so we are proposing to pay a final divi of 4p, which will give a full year divi of 6p. So I will then hand over now to Lily to talk about financial performance. Over to you, Lily.

Thank you, Paul. Good morning, everyone. I'm very pleased to be here with Paul and Scott today. And look. I'm very pleased with the progress we made strategically, commercially and financially in 2021. As always, I'll provide some more color about our financial performance in this section. And let me share with you the key financial metrics on one page. Can we move on to Slide 5, please? I would highlight that a significant number of metrics are on or better than 2019 levels. Now on a constant currency basis, revenue grew 12.6%, and 8.4% like-for-like, to GBP 960 million. Adjusted OP at GBP 84 million grew 46.5%, with OP margin 200 bps ahead of 2020 and slightly ahead of 2019. Adjusted EPS grew 55% to 18.2p, with a proposed full year dividend of 6p, as Paul said, clearly demonstrating our progressive dividend policy. Now I'm particularly pleased with our net debt ratio at 1.5x and that our ROIC at 9.1% also broadly returned back to the 2019 level. It's fair to say, looking at the full year performance, the 3 things that I spoke about during H1 result, the growth, margin expansion and strong balance sheet, continued into the second half. Now moving on to income statement, Slide 6, I'll pick up a couple of numbers here: adjusted profit before tax at GBP 67.4 million, 61% up versus 2020; and adjusted net earnings at GBP 54.8 million, which was up 71%; with adjusted EPS of 18.2p. You will notice that we labeled 2020 column as restated. This was due to the implementation of IFRIC's decision agenda on Software as a Service which resulted in a change of accounting policy. The most significant impact relates to write-off of certain amount from our intangible assets for 2020 and 2021. Now details of the impact and the restatement can be found in the appendix, where you can also find reported income statement with reported EPS for 2021 of 8.9p. The difference between reported and adjusted EPS was due to the amortization of acquired intangibles and adjusting items, including the charge from [ SaaS ] accounting policy change. Now moving on to Slide 7. This page outlines revenue by division. Components reported revenue of GBP 302 million, a like-for-like growth of 21.7%. On a sales per trading day basis, second half continued with the positive trend we've seen in the first half, with over 14% growth delivered in the second half versus 2019 level. The strong and consistent growth was delivered against the backdrop of supply chain disruptions. Now Packaging delivered revenue of GBP 362 million, a 3.6% like-for-like decline from 2020 driven by lower level of elective surgeries and prescriptions versus pre-COVID time for most of the year, also from the impact of labor and raw material availability. We saw an encouraging performance in Q4 with division returning to growth. Versus 2019, the like-for-like decline was 8.2%, also reflecting that in H1 2019 the business was positively impacted by the introduction of the Falsified Medicines Directive in Europe. 3C! Packaging that we acquired in September 2020 contributed around GBP 34 million to division's top line. Now the order intake and order book in early 2022 remain encouraging. Filters reported a revenue of GBP 296 million, a 12.9% growth and 6.7% higher than 2019 against backdrop of structural decline in the tobacco market. Outsourcing contracts won in the last couple of years was main source of growth, together with the volume ramp-up in our China JV in the second half of the year. Now overall group revenue up 8.4% like-for-like, with accelerated growth in Q4, speaks to our response to the supply chain disruption and our innovation and sustainability-led growth strategy. Now move on to Slide 8, summarizing profitability by division. Components posted GBP 57 million profit, an increase of 31.2% against prior year at constant currency, with a very healthy margin just under 19%, an improvement of 100 bps. The division successfully implemented a second round of price increases in Q3, which effectively offset the [ India ] cost inflation. And we saw a very encouraging Q4 margin at 2019 level. Now Packaging reported a profit of GBP 15.4 million, a growth of 17.6% versus 2020. Full year margin was 4.2%, and Q4 2021 margin at 7.9%, thanks to self-help actions and some timing-related onetime cost benefit. The latter accounted for about 200 bps in Q4. The major plant restructuring activities completed at the end of H1 delivered benefit from H2 onwards. Filters OP was GBP 28.2 million, grew by 20.3%, with margin of 9.5%, 50 bps improvement on 2020. And versus 2019, the margin reduction was largely driven by lower NPI volume in the mix due to COVID. And we started seeing some improved level of NPI activities from some of our customers. Q4 margin was at the 2019 level. Now all our divisions and functions continued to balance between cost management and investment in innovation and other growth initiatives. The reported GBP 16.6 million central cost was GBP 6 million lower than 2020, driven out by some one-off credits as well as savings realized from organization changes. Overall group OP, at GBP 84 million, 46.5% up versus prior year; and a margin of 8.7%, slightly ahead of 2019. Now moving down the P&L, Slide 9, please. Net finance charge of GBP 16.5 million, higher than 2020 due to slightly higher increased charge in the period, ForEx movement from leases and higher amortization of facility fees. Our effective tax rate reported is 16.6%, which is lower than the underlying ETR, which is 19.7%, due to the impact from U.K. change of corporate tax, which will have a onetime noncash benefit of deferred tax asset movement about GBP 2 million. Our underlying ETR is in the guidance of 19% to 20% we provided. Noncontrolling interest was GBP 1.4 million from our India and China JVs. As we previously communicated, our China JV commenced production in June as planned. And we saw a small operating loss in 2021 at around GBP 1 million. Now moving on to Slide 10, I will highlight again our net debt ratio was 1.5x, consistent with the 2020 year-end position. Our operating cash flow conversion was 77%, which was lower than the historical average around 90%. We have invested about GBP 30 million into the working capital in the form of [ data ] and inventory to support revenue growth as well as mitigating the wide supply chain disruptions. But more importantly, I would highlight that our net working capital-to-revenue ratio was 12.8%, an improvement of 140 bps versus 2020 and 2019. We continue to invest into our business, with CapEx spent around GBP 41 million. As explained in the beginning, on accounting policy change with Software as a Service, the BPR-related spend is now reported in the other adjusting items. Our spend of GBP 41 million is largely in the category of machines and toolings upgrade, China JV investment and also supporting Filters outsourcing programs. Now adding the CapEx and BPR together, the overall spend is in line with our guidance previously provided. After paying interest, tax and pension contributions, our free cash flow was GBP 36.7 million. Now moving on to Slide 11. Our net debt increased by about GBP 21 million after adjusting for ForEx. We maintained the same net debt ratio, as I mentioned a couple of times already, after paying GBP 16 million dividend and spending about GBP 15 million on Components acquisition of Hengzhu. Overall, we maintain a very strong balance sheet that will continue to support organic and inorganic growth. Before I hand it over to Scott, let me summarize again that I'm very pleased with the '21 result, with 3 highlights, growth, margin expansion and strong balance sheet; and with a significant number of key financial metrics on or better than 2019 levels. Now with that, I'll pass it on to Scott to provide an update on Components. Scott, over to you.

Thanks, Lily. And Good morning, everybody. [ It's lovely to be with you ] today. If we move on to Slide 13, please, let me give you an update from the Components division. If we look at the numbers -- Lily and Paul have both talked to the financial numbers here [indiscernible] detail, but a good, strong financial performance with solid revenue growth and margin expansion. Talking to the commentary behind that, operationally, a very challenging year, significant disruption from supply chain challenges in every way, shape or form, be that raw materials or labor or freight or inflation costs. So we've done a good job of managing through that, especially in light of the significant increase in demand that we saw as the economies recovered from the initial impacts of the pandemic. A big part of our [ plans and activity ] last year, which Lily has referred to, is around the pricing action we undertook, the 2 rounds of [ price we put incrementally ] in the year. I'm pleased that we've managed to offset the inflationary costs as we closed out the end of last year as well. Digitalization remains a strong focus of our strategy looking to improve the customer experience. I am pleased that we continued to roll out the websites across Asia. The last site actually went live last week in Turkey, so we now have 26 websites live in 16 languages around the world, giving us a great platform to continue to improve the customer experience. And we are doing monthly releases and improvements to those websites with our [ agile ] processes. We have started the rollout of our ERP program, which went live in Spain at the half year; and continue to work hard to drive an improvement [ to then ] focus on the rollout of the ERP program. It is a fundamental platform to enable our future growth and success of the business as well. There has been some work to streamline our operational footprint. We've closed 3 smaller manufacturing sites which were part of previous acquisitions and a number of smaller warehouses through the year to both improve customer service and manage the footprint efficiencies as well. And we're making good, solid progress towards our sustainability goals, which I'll explore in a little bit more detail in the next slide. If [ we move to ] Slide 14, please. So our vision is to become the world's leading responsible, hassle-free supplier of essential industrial components, so we're on a journey to make the business world class effectively. There are a number of pillars to that. So driving organic revenue growth is part of our ambition, clearly, this industrial production plus 4%, 5%, 6%. And the key to driving that forward are really focusing on our category management approach, working in those categories which are going to show high growth potential such as renewable energies, electrification of vehicles, areas that we're involved and focusing on globally. And the key commercial metric for the organization is one of cross-selling, so driving a broader basket of goods into our customers from the very wide range of products that we manufacture and distribute. And in the recent customer survey, customers did confirm that that wide range is the main reason for them recommending Essentra to their colleagues. So it clearly fits with their needs as well. The key for us driving forward this year is to move back into the commercial effectiveness programs as the supply chains are normalizing and service is improving, starting to drive our commercial effectiveness programs and backed by the new CRM technology that we put in place over last year or so will help us move forward this year. Moving on to our digital customer experience, continuing to invest in digital to drive a hassle-free customer experience, using data and AI to support better targeting. And we are looking to create a new digital talent focus, a new hub, this year to support our digital growth. The focus of the program really is moving on now from the rollout of the websites, which is all but complete, and thinking about how we optimize, with a particular focus on digitalizing the expertise that we have within the organization as it's key to meeting some of our customer needs. So digitalizing expertise through knowledge management will be a big focus for us. And finally, from an organic point of view, working on our class-leading sustainability, we are focusing heavily on the use of sustainable materials. We have driven the recycled content that we're using across the division from 2% to 8% last year, with an exit of circa 10%. So continuing to drive that hard and look at different materials and different sources of materials to continue to improve that metric this year to at least 15% as we come through 2022. So that's our organic story. Thinking about our inorganic story, on Slide 15, we continue to work hard on the inorganic pipeline. We operate in this very fragmented market where we have circa 4% share in an GBP 8 billion to GBP 10 billion end market. There are lots of acquisition opportunities for us looking to help us consolidate, typically looking at new products and solutions to help us cross-sell further to our existing customers; and leveraging the platform that we have with digital with supply chain networks that we have in place. So we continue to work and to strengthen our M&A pipeline; and have a number of ongoing active conversations both in terms of developing relationships with private owners, but we'll also continue to look at inbound inquiries as well; and have assessed 5 or 6 inquiries in recent months, most of which we decided weren't right for us, again showing a good level of discipline focusing on looking to a suite of opportunities that will help us move the business forward. Since the last published results, we have completed the acquisition of Hengzhu. This is very much a strategic sweet spot for us, our #1 product area in terms of growth, our #1 target geography in terms of China. And the initial progress has been excellent. [ Commercial synergies ] are being delivered. We are successfully cross-selling this product range into the existing China customer base and driving the business forward very well, so priority this year is to continue that post-merger integration plan and deliver the business case that we've committed to. So thank you. That's it for me. Let me hand you back over to Paul.

Thank you, Scott. Thank you very much indeed, Lily, as well. If we go on to Slide 17, please, a summary of Packaging. As Lily has already mentioned, the -- particularly the earlier part of the year last year was impacted by the lower prescription and elective surgery volumes. In Q4, however, we see a positive trend. And in Q1 of this year, the trend is probably going to be more back into the range that we've talked about as being typical for this particular sector, so that's encouraging. We have, I think, an unprecedentedly high, strong order book at the start of this year. And it's good to see that being geographically consistent in its growth. And very much as Scott faced last year, a lot of our challenge is more about satisfy supply-side challenges and keeping up with the demand, so supply is as much a rate-limiting factor as demand currently. I'm very pleased with the self-help actions that Packaging has taken in 2021, some major efficiencies gained from closing 2 manufacturing sites and those notwithstanding the fact that we have a lag between quite material cost increases both in labor and raw materials. The lag between that and pricing, which is beginning to kick in now, meant that -- and there is a caveat there that Lily mentioned that there were some cost timing benefits, but nonetheless encouraging to see that in Q4 the margin at the divisional level was at just a tad under 8%. As well as focusing on cost efficiency and self-help and managing the supply chain challenges, it's really pleasing to see the business moving forward in terms of driving its sustainable offering. I believe that we lead the way in the industry on that. And it is wonderful to see the team's efforts recognized through winning things like Accord's COVID supplier of the year; and also winning a gold award for working with a personal care provider using a totally non-adhesive non-plastic product that has been -- gone down really, really well. In terms of the strategic priorities, it's about firmly getting into that industry average margin on a sustainable basis. Clearly the growth will help us on the operational gearing. And we have a combination of tailwinds from pricing and headwinds from supply-side challenges, but the team are making good progress there. Innovation, which has really accelerated in the last year or so, has been based on 2 key areas: sustainability, as I already mentioned, but also patient safety, whether that be child-proof packaging, whether it be tamper-evident packaging, whether it be individually coded cartons, et cetera, really big steps. And I've been really enjoying discussing [ at a set of top-to-top ] meetings with some of our largest customers the kind of portfolio of solutions we can now offer them. And that's really these deeper customer partnerships are the way forward for that business. And there is still more to do to optimize our supply chain. It is complex. We do have a complex network of factories and warehouses, but continuing to do that will help drive those sustainable margins. So that's Packaging. If we sort -- turn on to Slide 18 and talk a little bit about Filters. You can see the operating margin there, 9.5%. That is after an impact of the China JV and the investments being made in that. It probably will be closer to double digit if one were to adjust for that. Really good to see sustained growth based on both an acceleration of our outsourcing contract business and the China JV. We really started focusing on this outsourcing about 3 years ago, and you can see that it's now worth an annualized GBP 50 million or more, so very material in the context of a GBP 300 million division. We've seen good volume ramp-up, and the relationship there is going well. We are serving an increasing number of the industrial companies there. And we've commenced work on a China development center as well, which is a linchpin of that relationship. And whilst it has not yet delivered big dollars, both the ECO, which as you -- or those of you who've talked to me know, I'm really excited about both as a commercial opportunity but, as important, as a contribution to the well-being of our planet; and Tobacco Heating Products. Those are increasing in terms of the interest that we have. And indeed we're -- now broken the half century for a number of development projects with ECO. And you can see 2 new ranges there on the right-hand side. Our performance operationally is truly world class. We always aspire to between 99% and 99.5% OTIF. And our quality rates are still in the very few parts per billion in terms of defect, so team is doing an outstanding job there as well. And the Tapes business, which we shouldn't forget has contributed really well as it pivots away from being very reliant on the tobacco to a product we call Rippatape which is to support the Amazon packages that we all get now, has returned to growth. So the strategic priorities, I think, are self-evident. China and ECO are 2 linchpins, as is continuing these outsourcing opportunities. And I do really believe there's been a sea change in how our key customers regard us, hence the material increase in that. We truly are partners, as opposed to suppliers, not only because we deliver world-class service and product quality but also because we're bringing lots of new innovations. And we offer them, if you like, business continuity of supply, so we give them that reassurance. And our focus continues through a combination of those factors and operational gearing; and also the fact that, as Lily mentioned, we're seeing more of the NPI, the new product introduction, business, which tends to be slightly higher margin. We're focusing on driving the margins back to those FY '19 levels. So that's all I wanted about the divisions. If we then go just on to Slide 19 and stand back and really review what we're doing in the ESG space. And so the E then S then G, logically enough. Our normalized figures for GHG reduction, and we have committed to a 25% reduction by 2025 and net carbon neutral by 2040 on a total basis. You can see encouragingly that our baseline for 2019 on a -- normalized figures now adjusting for volume growth. We're now almost 20%, so well on track there. Our climate change [ for ] CDP went from C to B. We've already heard that Scott and the Components division, against their target of 20% responsible raw materials by 2025, is exiting the year at 10%. And bearing in mind that's really one polymer type in our major factory in Kidlington. So there's an awful lot of scope to expand, and Scott and the team have a road map to getting there or beyond. When we first communicated our targets on 0 waste to landfill, we committed to be having 0 by 2030. You can see there that we've done almost half. And we'll add another few, so I think 2030 will prove ultimately a very conservative target. And then reduction in waste volumes, very significant there, an 11% reduction. So whether it be the products, like Re*flect in Packaging or ECO; all of the processes which [ we have ] had there, really, really proud of what the team have done in that space. Socially, we've always placed huge emphasis on the physical and increasingly the emotional well-being. And I think we've got a pretty strong relationship with our people, [ you've seen ], trying to do the right thing through these terrible last 2 years. And we continue -- we recognize that in these times where we are enforcing change upon the organization, very positive change but nonetheless change, that communication and engagement is at the forefront of what we do. It is absolutely vital. We continue to help sites, particularly in the developing world like India or Indonesia or Thailand, secure vaccinations. And we're now into the realm of giving boosters to all of our employees; and supporting them through the Essentra Thrives program, which is all about emotional well-being. Equally, whilst we have no employees or assets in Russia or Ukraine, we do have both Ukrainian and Russian employees in other parts of the Essentra family. And we are providing support to them. We felt very strongly, we made a corporate donation also to DEC Ukraine. And for clarity: since the 24th of February, we have made no sales into Russia. And all sales are suspended until further notice. We've taken no orders. And we've communicated that to our customers. And then finally turning to governance. Again I think we're making good progress not just in terms of the -- if you like, the structures but actually the activity as well. So we've established -- as well as a Board Sustainability Committee, which is chaired by Ralf, [ one of our nonexecs ], we have an ESG committee to really pull everything together and knit it together to make sure that we are hitting the milestones we've set. We continue to emphasize the importance of compliance, and I think very good levels of awareness there. We have Adrian, who came across into the Board and is now the new Board employee champion in Americas, which gives us better geographic coverage and obviously a kind of local understanding. And we've been working extensively with a third party to inform our response to TCFD recommendations, et cetera. And you'll be able to read that and the detail behind it, which I think is very comprehensive, in the annual report. And last but not least, the Group Risk Committee, which I chair, is highly proactive. We have an open invitation to Mary as the head -- Chair of Audit and Risk Committee but indeed any other NED to sit in. And I think we're making good progress there. So I think, overall on ESG, we've had a year to be satisfied with, if not proud. And then finally then, if we turn on to 21 and 22 for an outlook, if we start with 21 [ and reprise ]. We've had, as I've indicated, strong start to the year across all 3 divisions. The Q1 growth rate, certainly for the first 2.5 months, is ahead of what we saw in Q4 of last year. Our bigger focus, as you'd expect, therefore is about managing supply chain, as opposed to creating demand; to scale our presence in Russia and Ukraine. That's circa 2% of total revenue, 2%, and will be less than that of our profitability. And as I mentioned before, all sales are suspended until further notice. The process of our strategic reviews, which we will say -- have said will be crystallized no earlier than Q2, continuing in line with expectations. As Lily has mentioned, and there was quite a material difference between constant and actual FX, the appreciation of the pound against U.S. dollar, euro and Turkish lira and which -- and Turkish lira is not a big currency for us, but it has moved so much that it doesn't become immaterial -- is something that we're aware of. And then if I look finally in the outlook. Components, we're seeing strong underlying demand. You know as well as I do the kind of PMI data, which is the best proxy we have for future. And the orders look good. Packaging, as I say, is back in the kind of revenue growth zone that we've been used to. And Filters, through self-help and these game changers, particularly China JV and outsourcing contracts but with new product introductions and ECO to come, is well set and has enjoyed a really strong start to the year. So finally then, on 22, my 3 points: one, I think, a really good financial performance in all key metrics and critically across the 3 divisions with good financial performance back to 2019; secondly, a 2022 that has started well across [indiscernible] and is putting most of our focus on supply side as opposed to demand; and with that, a strong balance sheet, good progress on ESG. And as a sign of confidence, the Board has -- recommending a progressive dividend of 4p. So overall, I think, a good year, well set and on track to crystallize those strategic reviews. So thank you very much for your time and attention, and I believe now that we will move on to Q&A. Thank you very much indeed.

[Operator Instructions] Your first question today comes from the line of Charles Hall from Peel Hunt.

So you talked about like-for-like sales accelerating in Q1 versus Q4. Can you just give a bit of information on the pricing benefit in comparison -- in comparing those 2 quarters and so effectively, by implication, what -- the volume performance you're seeing?

There isn't a material difference in pricing impact in Q1 versus Q4 last year, Charles. So we've -- as you know, we're about 13% in Q4 across the group in aggregate. And we've gone to mid-teens in Q1 -- or we will do. We're 5/6 of the way through. And we know our order book. So no, that's pretty much an increase in volume. There is some increment, but it's at the margin.

Perfect. And on the pricing side itself and costs pressures you're seeing, where are you in terms of recovery of those costs? Do you need to do more? Or I know you put through price increases and started this year as well, as you're doing back end of last year. Where are we on that trend?

I think, yes, we're actually making pretty good progress, Charles. Clearly we've got -- the latest challenges is energy, but we're well hedged on that. And to put it in context: energy is circa 1% of our sales. So we're not remotely -- an energy-intensive business. We see probably -- well, you tell me what the price of oil is going to be, but when we did the analysis earlier this week, we saw an increment of circa 4 million, so less than 0.5% of sales. And we'll recoup that in year. So it's not material and we can recoup it. And in terms of the ability to absorb costs, Charles, I would say that, based on what we've seen through self-help actions, through the impact of operational gearing and you're looking at the trends in margin in Q4 and then Q1. We see not only strong revenue growth but margin expansion in all 3 divisions this year still. Now clearly I don't know what's going to happen to the world. So that's the caveat, but yes, we've started strongly. And as I said, Charles, we expect margin expansion in all 3.

Perfect. And one other thing you mentioned was there are still issues about getting supply through to the customers. And obviously that was particularly the case in Packaging last year in the States. Where are you in terms of ability to deliver on the demand you've got and maintain your service levels?

We -- is that a division-by-division or a Packaging-specific question, Charles?

Well, probably division by division but specifically Packaging.

We have got still some supply-side issues, which are things like availability of board. At a more marginal basis also, we're seeing more absences due to COVID in the places you would expect like U.K. and U.S., but that's not particularly material. So yes, we are seeing an improved supply-side availability in Packaging such as the growth in orders that actually we're now -- we're probably in a state where our ability to supply limits our ability -- so yes. Our supply-side capabilities are more of a limit on sales and orders. So effectively Packaging is facing the dilemma that Scott and the team in Components faced about this time last year but overall improving. And as a result of that, we've seen Packaging go back into that standard range, the formula we have, the 5% to 7%, being a kind of par for the course. And so we've seen a strong sequential improvement, Q1 to Q3 negative, Q4 positive low single digit, Q1 this year mid-single digit.

Your next question comes from the line of Andrew Douglas from Jefferies.

Yes. I have the standard 3 questions as well, although maybe 1 quick follow-up. Can you talk to us about the -- I guess, the next foot -- leg of the evolution of Components? You talked about digital and the progress you're making there. And kind of next step for '22 seems very logical. What's beyond that? I mean clearly we had some good progress in AI. You're talking now about what you want to do in '22. Is there much to do kind of materially beyond '22? Or is it -- are we now in kind of maintenance and kind of upgrade phase?

Well, I'll paint in the broad strokes and then Scott can fill in the detail. I would say that, the digital front end, there is still a lot that we can do. We have started a journey using AI, but are we really embedding smart pricing, et cetera? There's a lot more there and cross-selling, facilitating cross-selling. The other main area, Andy, is the digital back end which will help our efficiencies. It will help us assimilate acquisitions, et cetera. And the third, I would say, is doing even more on marketing. So as you recall, we started setting up category management approaches, as an example, and I think, embedding that. So those are the 3 biggest organic levers that I can see. That's probably a totally inaccurate answer, though, so Scott will clarify and improve.

Thanks, Paul. Andy, yes, I mean digital is -- the great news is we have the platform in place. We have one planned launch in Thailand to come, but fundamentally the rollout is complete. It's now about optimizing and continuing to improve the customer experience. I sort of talked in there the big theme for this year is around digitalizing expertise. We have a lot of expertise around the business from our manufacturing capabilities, and getting to share that globally is going to be a key theme. And how we get that knowledge in front of customers to help them find the right products areas is something that we're quite excited about. So digital is now optimization of the platform we've built. As Paul said: the back end, the BPR program, is a key enabler for us. Getting much better data both to help run the business and to communicate with customers through having this global ERP platform in place will be key. So obviously we're expanding and continuing the rollout of that through this year and next. And then beyond that category management Paul says, we've got some interesting activities now looking at some high-growth categories. Renewable energy is a good area for us. The EV charging is a great area for us. So starting to really globalize some of those programs, particularly as service starts to normalize. We've been on a recovery road from a service point of view since around August where it was at its worst. We should be recovered by half year. And as service gets back to normal, we're going to get more on the front foot from a commercial opportunities point of view.

I'll say, now I've been listening to Scott, Andy, there's one other thing, which is we've made big strides, I think, on the sustainability agenda. Actually I think we are leading the way in terms of the use of post-consumer recycled and other responsible sources. That, we will continue to roll out, but then also we're working with 1 or 2 key customers, for instance 1 in the commercial vehicle sector, where we are working on a journey to basically total circular recovery of products. So I think those are the 4 key organic levers.

Yes. And then obviously inorganic remains a key area of priority for us. And we continue to work on the pipeline.

Yes, [ very cool ]. And then just whilst you're there, Scott, on the BPR, there's 1 or 2 challenges this year. Are we expecting a reasonably straightforward year next year once you've kind of figured what those issues are and then make sure they don't happen again? Or are we in a year of kind of trying to figure out what's going on there?

No, I think we've figured it out. We've brought some new resources in place. I think we're in a much more confident place. We're about to start testing for our second market. These things will never be perfectly smooth, but I'm expecting a 95% improvement as we hit front. So I think we've learned a lot from the first go live. We've sort of refocused and I'm expecting us to move forward well.

And not only that. We also -- last year, we have exceptionally high customer demand, right, rolling out the ERP system. And that has to be put into the context.

Okay, cool. And then Lily, whilst you're on, just on central costs, a few one-offs in the '21 numbers. Can you quantify kind of what they were and how much? And what should central costs be going forward on the premise that Filters and Packaging are no longer part of the group? Can you also just give us a breakdown, rough breakdown, of energy split between kind of gas, electricity, oil? I understand it's predominantly electricity, which is because it's not gas. And then just can you tell us, what were the outsourced contract wins in '21? You talked about GBP 50 million going forward. What does that compare to in '21, please?

That's, Andy, I thought I got one question, but [indiscernible].

Yes. [ I gave you 3 rather than 1 ].

Let me come back to the central costs, first, Andy. Look, about 2/3 of that 6 million is one-off. It's actually relating to some sort of indirect tax that we previously accrued and now got recovery. So in terms of going forward how I see the central costs, we're still doing the strategic review, Andy. And to your point, the group -- the shape of the group, likely to change. And [ at this station ], I think we still go back to what we talk about before last time...

10 -- so Andy, that's 10 million.

Okay -- nice straightforward number, cool...

Yes, yes. It's [indiscernible] -- yes. We still say high single digit [indiscernible], yes, [ PRC ] cost component, yes.

High single digit, yes.

Yes, yes. And...

And in terms of energy split, Andy, you're right. We are not a big gas user. So what we -- what Paul just talk about, the 1.2% revenue, that's largely electricity.

Yes.

That's pretty much all electricity. And to Paul's point, we are quite well hedged. We're about 40%-ish hedged.

Okay. And then last but not the least, just outsourcing.

Yes. We had 2 outsourcing contracts secured in the year of 2021, and we started delivering those in the second half of the year. I think order of magnitude is somewhere around sort of mid-teens to high teens.

Okay, so good opportunity to go forward, perfect.

Yes.

Your next question comes from the line of Andres Castanos from Berenberg.

One question about Filters margins. I wanted to understand how several factors are impacting it, raw material inflation, China JV and these outsourcing contracts.

Okay. So if I take the first one. As you know, [ acetate too is our ] major raw material. And we haven't really seen any impact there. Filters will have sufficiently increased pricing to mitigate any cost increases in the year. This obviously, Andres, has the normal caveats of I don't know what's exactly going to happen to energy, but we are pretty well hedged. And we're not energy intensive in Filters at all. The impact, if you were to back out the China impact, you'd be at about 10% margin, as opposed 9.2%. And we're expecting, as I said, margin expansion. The outsourcing deals, when you're in the startup phase, have some kind of dilutive impact as you get up a learning curve. And that's probably the main reason for some of the margin dilution, but that's why we're confident that Filters will see margin expansion above that underlying 10% and will be on a journey back to getting to the historic levels. Does that answer the question?

That's great. Maybe following up with raw materials costs in packaging. What are you seeing there and how prices will be passed on in 2022?

Packaging?

Yes, Packaging, cardboard...

Packaging, yes, cardboard. And it's the same story that we've seen in the other divisions, which is that we're -- between Packaging costs and now energy costs, with the pricing actions, we believe that we will at least offset. We keep this very live, as you'd imagine, and discuss possibility of surcharges as well as price rises on the basis that they can be revoked; and are more flexible up and down with, say, energy costs. The bigger challenge, and it's not us, it's an industry-wide thing, is availability, particularly of board. Clearly there is an increasing amount of demand for board mostly driven by e-commerce being a new driver, if you like. And you've obviously seen commentary by people like DS Smith. So net of all of that, I think, like the other divisions, you'll see margin expansion, the idea being that things like the annualized impact of the cost actions taken in Packaging and the operational gearing will be a net positive and that the cost inflation and pricing will roughly cancel each other out.

[Operator Instructions] Your next question comes from the line of James Beard from Numis.

A couple of questions from me. Firstly, just on the strategic review, obviously it's been about sort of 4 or 5 months since that was first announced. And we've seen a sort of downturn de-rating in wider global equity markets. And to what extent has that impacted the conversations that you're having with potential suitors for the 2 divisions? And I guess, a sort of slightly related question: You sort of [ plugged ] your direct Russia exposure, but presumably that, the 2%, is slightly greater within Filters than within the other divisions. And then a sort of second -- or third question as it were, just on Components. Any commentary on sort of the site footprint and any potential changes or rationalization that you might be making across 2022?

Okay. So start again. First question, James...

[ Strategic review ].

Strategic review. What -- is it different because of context?

Yes, yes.

I don't think so because the 2 businesses concerned, unlike Components, are -- pretty much have structural rather than cyclical trends. If -- the view is -- and I know, coming off a pandemic, it's not 100% guaranteed, but essentially the demand for medical products and medical packaging is pretty much independent of things to a sensible degree. And so those people who are interested in partnering with that division kind of tend to look through what's going on. I think ditto with tobacco. So if you're interested, I think you kind of look through any short-term perturbation. Second question, James, was...

Just a quick one on Russia exposure in Filters.

Right. Yes, you're right that in ascending order it's Packaging, Components and then Filters. Having said that, it's important to recognize, that product we were sending into Russia, quite a bit of that was actually for export markets out of Russia. And what you're seeing is the MNCs, the customers we have there are reconfiguring their supply chains. So whilst we don't and won't sell into Russia, some customers have actually asked us to supply other parts of the region as they try and service non-Russian markets in that part of the world. So there's a gross number which we've stated for the group. And then there's effectively a net number, which is very difficult to disentangle because we can't see into the bowels of what the likes of BAT or PMI are doing exactly. So we have actually had conversations at relatively short notice about trying to help customers with their specific challenges of servicing the other markets in that region. And then, on the third, I think I'll probably defer to Mr. Fawcett opposite the table.

James, just a quick one on footprint. No further plans at this stage. Our focus really is on capacity at this point in time. We've got strong demand. So we've got a couple of site expansions in the plan for later this year but no footprint consolidation plans at this stage for this year. We did do quite a few pieces of work last year which were also post-merger integration activities on some small manufacturing sites, but we're now focusing on serving the capacity effectively.

And I think, in the medium term, we will continue to look at our logistics footprint, particularly as we get BPR done, but Scott is exactly right that we've gotten 4 organic challenges and keeping up with demand at the moment, so now is not the time to be modifying our footprint. Clearly obviously also, James, it's M&A dependent, so -- but that's the current thinking there. In the top 10 priorities of the Components division, footprint isn't in it.

Okay, so -- and a very quick follow-up there. You mentioned obviously M&A is an active [ part for Components ]. Is that something that you would still contemplate executing even with the sort of ongoing strategic review of the other 2 divisions?

Yes, absolutely. We're bound by at least 3 NDAs at the moment.

Yes.

Your next question comes from the line of Charles Hall, Peel Hunt.

It's for Scott, so much more important.

What?

Scott, the Net Promoter Score obviously dropped last year, unsurprisingly, with all of the global challenges. Do you -- can you just give an update as to where it's moving and whether you're sort of getting back on track in terms of customer satisfaction and what remains to be done?

Yes, certainly. So we peaked or dipped to a low point really in August in terms of the size of the backlog we created and then the OTIF measure that goes with that. And from August, we've been seeing recovery. We're expecting to have the backlog totally cleared and OTIF normalizing about back -- by half year or OTIF normalizing in Q3 effectively. So that's on track. And the backlog is more than 50% down from where it started, which is encouraging. So at the moment, we're definitely seeing some signs of encouragement. The monthly NPS scores are gradually getting a little bit better as well, which is helpful. And so we do expect to see a recovery in NPS by the year-end, when we do the annual customer survey, but we're not there yet. But we're on track and meeting our expectations in terms of getting increased outputs. Supply chains are still unstable, though. Whilst our manufacturing output and capacity is improving and doing [indiscernible] we can, U.S. pool is still causing issues. Freight, it's still very inconsistent on intercontinental shipping. So it's still a -- again a "whack a mole" almost. Every time we fix one thing, something else will emerge, so yes, but we're doing a good job of going -- [indiscernible] the service back generally.

I think, Charles, the sales growth data trends would indicate we are not materially alienating our customer base at the moment.

Yes, that makes sense, very good.

[Operator Instructions] There are currently no further questions. I will hand the call back to you, sir.

Thanks very much, Sharon. Well, thank you all for attending. Just maybe finish with the 3 key messages, one of which is that I think it was a very strong performance across the board; secondly, that certainly Q1 would indicate that the goal we've articulated of margin expansion and sales growth, which we achieved in all 3 divisions last year, I think we're well placed to replicate that in 2022. And the milestones that we set ourselves for the strategic reviews internally are all still on plan, and we are still consistent with the time scales that we indicated. So thank you very much indeed for joining us. Clearly we will be doing the rounds and should the analyst community wish it, then Lily, on my left-hand side, will be delighted to address any particular question you have. So thank you very much indeed, and stay safe. Have a great weekend, everyone. And enjoy the sun.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.